The Move from JIBAR to ZARONIA

South Africa’s long-used short-term interest rate, the Johannesburg Interbank Agreed Rate (JIBAR), which has been the benchmark at which banks lend to each other, is set to change. This shift marks a significant development in the country’s financial system as authorities are aiming to bring this change in line with global trends in benchmark interest rate reforms, such as that experienced by the UK with the replacement of LIBOR (London Interbank Offered Rate) with SONIA (Sterling Overnight Index Average).

South Africa is expected to transition from using the JIBAR to a new alternative, the South African Rand Overnight Index Average (ZARONIA) by the end of 2026.

This transition is part of a broader effort to replace Interbank Offered Rates (IBORs), which were subject to manipulation and decreasing reliability due to fewer transactions and degree of estimation uncertainty underpinning them.

South Africa will adopt ZORONIA, which would be based on actual transaction data, typically using overnight rates. The transition will affect several financial instruments that are currently linked to JIBAR, such as loans, derivatives, and bonds. These will need to be rewritten or renegotiated to reference the new rate. Existing contracts with fallback provisions may specify how they will handle the transition. Banks, financial institutions, and corporates will need to adjust their systems, risk models, and pricing frameworks to accommodate the new benchmark. The changeover will involve significant administrative work and may have costs in the short term, but it is expected to lead to more accurate financial markers in the long term.

For borrowers, the transition to a new benchmark rate could affect interest payments, depending on how the new rate compares to JIBAR. For banks and lenders, the transition will require adjustments in loan pricing and risk management, but it will ultimately create a more consistent and transparent basis for pricing loans and financial instruments. The first ZARONIA swap was cleared in mid-September this year, and while the reform is still in its early stages, significant progress is being made.

In conclusion, South Africa’s adoption of ZARONIA would align it with global financial markets, which are increasingly moving towards standardised benchmarks. This is crucial for international trade, investment, and cross-border transactions, making the South African market more attractive to global investors who are familiar with these new benchmarks.

The transition from JIBAR to ZARONIA would have several implications for company valuations. The effect largely depends on how ZARONIA compares to JIBAR. A higher ZARONIA would increase borrowing costs, reduce profitability, and raise discount rates, leading to lower company valuations. Conversely, a lower ZARONIA could reduce financial costs, improve cash flow, and support higher valuations. The overall impact would also depend on the company’s leverage, sector, and exposure to variable-rate debt.

South Africa is one of several countries that have adopted benchmark rate reforms. These include:

The key differences between ZARONIA and JIBAR are summarized in the table below: